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BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ADJUDICATION ORDER NO. AP/AO-01/2006-07]

UNDER RULE 5 OF SEBI (PROCEDURE UNDER RULE 5 FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995, READ WITH SECTION 15-I OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992

 

In the matter of Investigations in

 

KWALITY DAIRY (INDIA) LTD.

 

AND

 

In respect of

 

BHARTI THAKKAR INDIA SECURITIES PVT. LTD.

 

1.0              Pursuant to the investigation in the scrip of Kwality Dairy (India) Ltd. (hereinafter referred to as “KDIL”), Securities and Exchange Board of India (SEBI) appointed Mr. K.R.C.V. Seshachalam, Dy. General Manager as the Adjudicating Officer under Rule 3 of SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995 (hereinafter referred as 'Adjudication Rules') read with Section 15 I of SEBI Act, 1992 to inquire into and adjudge the alleged practices of the Member Broker BSE; Bharti Thakkar India Securities Private Limited (hereinafter referred to as ‘Broker or Bharti'), that are prohibited under SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (hereinafter referred as 'PFUTP') and SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 for which penalty is imposable under Section 15-HA and 15HB respectively, of SEBI Act, 1992. The aforesaid appointment was conveyed vide order dated August 4, 2004 and vide order dated December 28, 2004, the matter was transferred to Mr. A.C. S. Rao. Subsequently vide order dated December 20, 2005; the matter was transferred to the undersigned.

 

2.0       A show cause notice (SCN) dated October 5, 2005 under Rule 4(1) of the said Rules was issued by AO, Mr. A C. S. Rao to Bharti, communicating the details of the charges levelled against him.   In response to the SCN, Bharti filed a reply vide letter dated October 26, 2005.

 

3.0       Under the aforesaid circumstances, and after going through the submissions of Bharti, the undersigned thought it fit to hold an inquiry in the matter. Accordingly, a notice of inquiry was therefore issued to Bharti vide letter dated December 28, 2005, fixing the date of inquiry on January 9, 2006.

 

4.0       Mr. Ajay Khandhar, Advocate appeared for inquiry on January 9, 2006 on behalf of Bharti and made submissions.  During the said hearing, the Advocate filed written submissions vide letter dated February 4, 2006.  The Advocate also informed about dropping of the charges under PFUTP Regulations by the Enquiry Officer in the enquiry proceedings based on identical charges.  

 

5.0       BACKGROUND:- 

 

Investigations revealed that KDIL suffered loss for the years ended March 31, 2000, March 31, 2001, March 31, 2002 and March 31, 2003. KDIL earned a net profit of Rs.1.06 million on turnover of Rs.34.48 million during the quarter ended June 30, 2003.  Investigations revealed that the total volume traded during the period of investigation was 3403923 shares.  During the period February 5, 2003 to March 31, 2003, the scrip was infrequently traded with a very small volume and from April 2, 2003 there was a price rise with increasing volumes.  From April 2, 2003 to April 11, 2003, there was price rise in the scrip from Rs.3.05 to Rs.11.25 and from April 29, 2003 to June 6, 2003 the price rose from Rs.11.70 to Rs.46.95. It was observed that out of the total volume, 3288016 shares were traded during the period April 23 to June 6, 2004 when some of the entities were involved in trading by entering into circular / reversal of trades.  Investigation revealed that during the period April 23, 2003 to June 6, 2003, around 25% of the volume of trading was due to circular trades / reversal of trades among different groups of clients and brokers.  The clients and the member-brokers of each of these groups bought and sold the shares among themselves by squaring off the deals often the same day through the same brokers(s) in a circular manner.  The artificial volume generated through these circular deals / reversal of trades was mainly during April 23, 2003 to June 6, 2003 and the volumes on most of the days was around 20-25% of the day volume and on some days between 30-40%.

 

5.1              Investigation further revealed that the clients viz., Shri Sayyed Mustafa, Shri Chirag Pujara and Shri Laxmanbhai Patel acting through the member-brokers viz., Bharati Thakkar India Securities (Clg.No.737), Bonanza Stock Brokers Ltd. (Clg.No.235) and Ramaben Samani Finance Pvt. Ltd. (Clg.N0.101) respectively had entered into circular / reversal of trades which resulted in creation of artificial volumes.  These clients traded amongst them in a circular pattern intra-day i.e. the shares being bought / sold by one entity were sold / bought by another entity in the group through a number of buy and sell deals. It was revealed by investigations that the clients traded in groups - Chirag Pujara and Sayyed Mustafa traded for 21 days, Chirag Pujara, Laxmanbhai Patel and Laxmanbhai Patel & Sayyed Mustafa for 5 days and the number of trades executed were large as tabulated under:-

 

Name of the Client & Broker Buy Transaction

Name of the Client & Broker Sell Transaction

No. of Trades

Laxman Patel ( Ramaben Samani Finance Pvt.Ltd. )

Chirag Pujara ( Bonanza Stock Brokers Limited )

140

Laxman Patel ( Ramaben Samani Finance Pvt.Ltd. )

Sayyed Mustafa ( Bharti Thakkar India Securities Limited )

119

Chirag Pujara ( Bonanza Stock Brokers Limited )

Laxman Patel (Ramaben Samani Finance Pvt. Ltd.)

111

Chirag Pujara ( Bonanza Stock Brokers Limited )

Sayyed Mustafa (Bharti Thakkar India Securities Limited )

532

Sayyed Mustafa ( Bharti Thakkar India Securities Limited )

Laxman Patel (Ramaben Samani Finance Pvt. Ltd.)

163

Sayyed Mustafa ( Bharti Thakkar India Securities Limited )

Chirag Pujara ( Bonanza Stock Brokers Limited )

588

 

T O T A L …………..

1653

 

 

5.2              Investigations revealed that the said trades were carried out for a number of days and the timings for the orders so placed also matched exactly at most instances, ranging between 0-60 sec.

 

5.3              In view of the above inter se dealings among clients Chirag Pujara, Laxmanbhai Patel and Sayyed Mustafa, it is alleged that brokers of the clients aided and abetted them to create artificial volumes and thereby violated the provisions of Regulation 4 of PFUTP Regulations and Code of Conduct prescribed under Brokers Regulations.

 

6.0         REPLY:  Bharti replied to the SCN vide letter dated October 26, 2005 and also filed written submissions dated February 4, 2006 as under:

 

6.1         The broker submitted that they were not aware that he company was a loss making company and that it had turned the corner and had made profit.  Broker further stated that they were not carrying out any proprietary trade in the shares of the company and therefore they had no occasion to look into the financial results of the said company at the relevant time. Broker contended that they had undertaken the transactions purely for the purposes of brokerage and in total the amount earned by them was less than ten thousand in the said transactions.

 

6.2         Broker further submitted that they were not aware that the total volume of the shares was Rs. 34,03,923 or that the volume increased from April 2003 onwards.  Broker further contended that they had about 400 clients and it was impossible to check on daily basis the volume and total market in each scrip in which clients undertake business. Since, the transactions undertaken were within the price band and were comparatively of a very small quantity.  Broker stated that they had no occasion to observe the price movement at the time.

6.3         Broker stated that they were not aware any circular or reversal of trades.  Their clients were undertaking transactions on daily square off basis.  They contended that from the report itself it was noted that at the end of the day there was no exposure whatsoever of theirs in the market.

 

6.4         The broker further submitted that they are independent entity and that they were not a part of any group or brokers.  Broker stated that they were dealing with an individual client only and that they had not dealt on behalf of any group of clients in the said shares.  Broker contended that they had undertaken the transactions purely as brokerage transactions as instructed by their client Sayyed Mustafa.  Broker argued that they were not aware of any artificial volume generated through the alleged circular deals/reversal of trades.  Broker contended that they were not aware of the total volume of the shares.  Broker submitted that at the time when the transactions were punched the counter party broker of the client is not disclosed on BOLT terminal and therefore they were not aware of the information which was set out in the chart incorporated in the show cause notice.  Broker further contended that except for Mr. Sayyed Mustafa neither Mr. Chirag Pujara nor Mr. Laxman Patel were their clients.  Broker submitted that they were not aware of any matching of order, quantity, price and timings of placing orders on buy and sale sides as set out in the notice.  They also submitted that the transactions would take place on the BOLT only when the quantity and price match.

 

6.5         The broker further submitted that they were not part of any group or have acted in concert with any other brokers and they have not entered into any circular/reversal of trades as alleged.  Broker stated that they have not created any artificial volumes. Broker contended that the average price of their transaction was within the price band but not at the highest or lowest price of the day and therefore, transactions undertaken through them were of very miniscule percentage of about 1% of their daily volume.  The broker contended that they did not have any effect on the price change of the said shares.  Broker submitted that they were not aware about any other entities buying and selling the said shares and that the said transactions were conducted through BOLT and were purely market transactions undertaken in normal course of business by their dealers at the instruction of their clients.  Broker stated that since the transactions were squared off transactions there was no question of said transactions being fictitious or it being circular transactions to their knowledge.

 

6.6         Broker stated that their dealer had punched in the transactions as per the instructions of their client only.  The said transactions were within the normal range of transactions undertaken through them generally by their other clients.  The said transactions hardly consisted of any volume compared with their overall volume.  Broker contended that since the transactions were undertaken on regular basis it cannot be said that the said transactions were in illiquid scrip as alleged.  Broker contended that expect for receiving a small amount of brokerage of less than Rs. 10,000/-, they had no other reason to undertake the said transactions and that they had not benefited in any other way in the said transactions.  Broker stated that their client might have the information about other people transacting elsewhere but the same was never conveyed to them by their client except for instructing them to execute the transactions.  Broker further submitted that there was no notice issued by the Bombay Stock Exchange or SEBI for any irregularities in the transactions of shares of Kwality Dairy (India) Ltd. while transaction were being undertaken.  Broker stated that they received the notice from BSE for the first time calling for the details of trade on 10.06.02003 and thereafter they had immediately stopped any further transactions for the said client Mr.  Sayyed Mustafa in the shares of said Kwality Dairy (India) Ltd.  Broker stated that the same goes to show that the moment they sensed something irregular, they stopped transactions for the said scrip.  Broker further submitted that meanwhile after they received a letter from SEBI regarding trading in said scrip on 18.12.03 vide letter dated 23.01.2004 they had informed Mr. Sayyed Mustafa regarding closing of his trading accounts and this shows their genuineness to market.

 

6.7         The broker submitted that since they were not undertaking any proprietary trades in the said shares, there was no occasion for them to consider upward movement of the price of the said shares with the fundamentals of the said company.  In merely undertaking brokerage business, it is almost impossible for them to co-relate the price movement with the fundamentals of the company.

 

6.8         Broker denied that they have misused their systems as alleged and contended that they had exercised due care and skill and obtained the broker- client agreement, individual client registration form and completed the formalities as they were required.  There was no default on part of the said client in meeting with his commitments.  There were more than 5000 listed companies and daily they deal in more than 100 companies shares and therefore it is not possible to keep tract of trading pattern of each individual client in each individual scrip with the trend in price and volume in the market.

 

6.9         The broker contended that they maintained highest standard of integrity and fairness in conduct of their business.  They have not indulged in any manipulative fraudulent or speculative transactions or schemes or spread rumors with a view to distorting market equilibrium or take any personal gains.  They have not created any false market by themselves or in concert with others or have indulged in any act detrimental to investors nor the transactions have led to interference with fair and smooth functioning of the market.  They have not undertaken any excess speculative business in the market beyond their reasonable levels or not commensurate with their financial soundness.  They have not violated Clause 5 of Code of Conduct as per Schedule II under Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 as same is not applicable to them and have therefore not violated the same.  They further submitted that they have not violated Regulation 4 (a), (b), (c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulation 1995 or Regulation 4 (1) and (2) (a), (b), (e), (g) and (n) of revised SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulation 2003 as alleged.

 

7.0         It has also come to the notice of undersigned that vide order dated February 1, 2006 passed by WTM, SEBI, registration of Bharti has been suspended for 15 days for the charges which were identical to the present adjudication proceedings.  It has further come to my notice that the said order of SEBI has been set aside by SAT vide order dated 21.2.2006 in Appeal no. 40/2006.

 

8.0         I have perused the order dated 1/2/2006 passed by the Board in respect of Bharti, and observe that it is passed in pursuance to the enquiry proceedings conducted under SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.  From the perusal, it is also observed that the subject matter of the order dated February 1, 2006 and the present adjudication proceedings is identical.  I have also perused the order of SAT and record the verdict of the Tribunal as under :-

      “5. We have heard the learned counsel for the parties and perused the orders passed by the Board in the case of all the three brokers including the appellant.  It is common case of the parties that the charges leveled against all the three brokers were that they had joined hands together and indulged in circular trading in the scrips of the company thereby creating artificial volumes. It is really surprising to note that in the case of Samani and Bonanza the enquiry officer and the Board both find that there were no circular trades but in the case of the appellant the finding is otherwise. All the three brokers were parties to the trades and if they were not circular while examining the cases of Samani and Bonanza, how could they become circular when the case of the appellant was considered.  The findings are self contradictory and cannot be sustained.  The least we can observe is that the impugned order had been passed without application of mind.

6. In the result, the appeal is allowed, impugned order dated 01/02/2006 set aside leaving the parties to bear their own costs.”

9.0  I note and record my finding as under:  

9.1   Now, in view of the order of SAT as detailed above where in the similar situation the order of SEBI has been set aside, I am left with very little to proceed in the matter.  In view of the same, I do not see, in the facts and circumstances of the case, any reasons to differ with the order of Hon’ble SAT, as no new facts are brought before me.  Also the SAT being an appellate authority, the undersigned is bound by the verdict given in the said appeal.  Now in view of the said order being passed in authoritative jurisdiction, and I being under the sub-ordinate jurisdiction, cannot travel beyond the scope and decision of the said order.  I am convinced that, based on the facts and circumstances of the case and relying upon the verdict of SAT, this is not a fit case for imposing adjudication penalty under the SEBI Act.

9.2   Therefore, in exercise of the powers conferred upon me in terms of Section 15-I (2) of the SEBI Act, 1992 read with Rule 5 of Adjudication Rules, I hereby order that adjudication proceedings against Bharti Thakkar India Securities Private Limited, be dropped.

10.0 This order of adjudication is made and passed on 28th day of April 2006 at Mumbai.

 

 

AMIT PRADHAN

ADJUDICATING OFFICER